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Business Combination
1. Core Components
The transaction involves the following key elements:
Acquirer: The entity that obtains control of the other business(es).
Acquiree: The business(es) over which the acquirer obtains control.
Control: The power to govern the financial and operating policies of an entity to obtain benefits
from its activities. This is the crucial element defining the combination.
Acquisition Date: The date control is effectively transferred to the acquirer.
2. Legal Structures and Types
The combination can be structured legally in different ways:
Legal Structures (By Transaction Mechanics)
Acquisition: One company purchases the majority interest in another company and takes
control. The acquiree often remains a separate legal subsidiary.
Merger: Two similarly sized companies agree to join to form one new, single surviving company.
One of the original companies ceases to exist.
Consolidation: A new corporation is formed to acquire the assets and assume the liabilities of
two or more existing companies. All original companies are dissolved.
Strategic Types (By Relationship of Companies)
Horizontal Combination: Companies in the same line of business (e.g., competitors). The main
objective is to increase market share and achieve economies of scale.
Vertical Combination: Companies at different stages of the production/distribution process (e.g.,
a customer acquiring a supplier). The main objective is to secure the supply chain and control
costs.
Conglomerate Combination: Companies engaged in unrelated businesses. The main objective
is the diversification of products and markets to spread risk.
3. Accounting Treatment: The Acquisition Method
The Acquisition Method is the required standard for recording all business combinations
(governed by standards like IFRS 3 or ASC 805).
Steps in the Acquisition Method
Identify the Acquirer.
Determine the Acquisition Date.
Recognize and Measure Identifiable Assets and Liabilities: The acquirer records the assets
acquired and liabilities assumed at their acquisition-date fair values.
Recognize and Measure Goodwill or a Gain from a Bargain Purchase.
Goodwill Calculation
Goodwill is an intangible asset that represents the future economic benefits arising from assets
(like brand reputation or an exceptional workforce) acquired in a business combination that are
not individually identified and separately recognized.
The calculation is: